DBRS Confirms Citizens Financial Group at A (low), Stable Trend

DBRS, Inc. (DBRS) confirmed the ratings of Citizens Financial Group, Inc. (Citizens or the Company), including the Company’s Long-Term Issuer Rating of A (low). At the same time, DBRS confirmed the ratings of its primary banking subsidiary, Citizens Bank, National Association (the Bank). The trend for all ratings is Stable. The Intrinsic Assessment (IA) for the Bank is ‘A’, while its Support Assessment remains SA1. The Company’s Support Assessment is SA3 and its Long-Term Issuer Rating is positioned one notch below the Bank’s IA.

KEY RATING CONSIDERATIONS
The ratings confirmation recognizes the progress the Company has made expanding its franchise and growing earnings since the IPO approximately four years ago. Citizens has largely achieved its medium-term targets as it executed on various strategic initiatives, including making franchise investments to build various aspects of its businesses, as well as ongoing expense initiatives, including streamlining customer facing processes. These initiatives have improved revenues and operating efficiency, leading to significant positive operating leverage. However, Citizens’ earnings remain more reliant on spread income, as compared to other regional banks, and the level of earnings, while improved, still lags relative to similarly rated peers.

Citizens’ ratings also reflect its strong regional banking franchise, with competitive positions in affluent and economically diverse markets across New England, the Mid-Atlantic, and Upper Midwest. Citizens maintains the second largest deposit market share in New England. The franchise also benefits from several national consumer lending platforms, including retail, auto and education finance lending, which are primarily focused on prime borrowers, as well as commercial lending. Citizens’ asset quality, solid funding and liquidity positions, and strong capital profile provide further support for the Company’s ratings.

RATING DRIVERS
Continued momentum enhancing the franchise, growing the level of earnings, including building the percentage of non-interest income, while maintaining a sound balance sheet could lead to positive rating implications. Conversely, a reversion to weaker profitability metrics, or a sustained increase in credit losses that exceed peer levels; especially should they result from a perceived increase in risk appetite or weak underwriting, could have negative rating implications.

RATING RATIONALE
Citizens’ operating results in recent periods have benefited from revenue growth and successful expense initiatives, which have both contributed to positive operating leverage. The Company’s net interest margin has benefited from the recent rate hikes, as its loan portfolio has repriced faster than liabilities. DBRS notes that Citizens’ balance sheet remains asset sensitive and earnings should benefit from any additional increases in short-term interest rates, although deposit betas at Citizens, as well as other regional banks have been accelerating. As a result of improved revenues and expense initiatives, the Company’s underlying efficiency ratio improved to 58% in 3Q18, approaching its mid-50% range medium-term target.

Reflecting the current benign credit environment and comparable to recent trends at most regional banks, asset quality at Citizens has shown continued improvement, with non-performing assets and net charge-offs likely at or nearing cyclical lows. However, DBRS expects credit metrics will likely normalize at this point in the credit cycle, and as Citizens’ works to boost the risk-adjusted returns in its loan portfolio.

The Company’s well-established deposit franchise is the anchor of the funding profile. Additionally, Citizens’ new digital bank creates an additional platform to raise deposit funding on a national level. Despite ongoing capital management activities, capital levels are considered strong and remain at the high end of peer averages. However, DBRS expects capital ratios will trend lower towards the peer group over time through ongoing buybacks, an increased dividend payout ratio, as well as organic growth. As of September 30, 2018, the Company’s Basel III fully phased-in Common Equity Tier 1 ratio was a solid 10.8%.

Headquartered in Providence, Rhode Island, Citizens Financial Group, Inc. reported $158.6 billion in consolidated total assets.

The Grid Summary Grades for Citizens are as follows: Franchise Strength – Strong; Earnings Power – Good; Risk Profile – Good; Funding & Liquidity – Strong; Capitalisation – Strong.

Notes:

All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is the Global Methodology for Rating Banks and Banking Organisations (July 2018), which can be found on our website under Methodologies.

The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: John Mackerey, Vice President – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: 11 October 2005
Last Rating Date: 11 December 2017

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com.